Payroll Taxes

We will look at the various types of taxes placed directly
on the income of the wage earner and see how that affects our beliefs
about the tax system.

Updated 5/18/09 draft

There has been much talk about the fairness of our current
tax system. Some people say it should be graduated. Some say flat. All
say it should be fair. We start by looking at tax data reported by the
IRS for 2006.

Here we see typical income tax vs. income. The poor pay a rate
slightly lower than 10%. The tax rate rises gradually through the
middle class to nearly 15%, before jumping to a maximum of 27% for
the rich. We notice quickly that income taxes are not consistently
graduated. Above $1.5 Million per annum, the real tax actually tends
to be regressive, dropping to lower rates as incomes increase. The
result is that the superrich are paying a lower rate than those
who make over $200,000.

But wait! We failed to consider payroll taxes, which
include Medicare and social security. Medicare is a flat tax (1.45%).
Social Security has a ceiling amount. Thus, it is regressive for all
incomes above the ceiling. Now, we see the poor are paying about a
17% tax rate. The upper middle class are paying about 23%, and the
rich are paying about 29%. Now when we look at the regressive slide
for the superrich, we notice they are actually paying a lower rate
than those who make over $150,000.

But wait, there's more! Each employer is required to pay taxes
on the income of every worker they employ. These taxes are also
regressive at higher incomes. This can be thought of as money they
pay to the government for taxes, instead of paying it to the worker
as income. What if we account for what the worker is not getting
because the employer has to pay it in taxes on his behalf? Now the
poor are paying nearly 25% in taxes, the rich 32%, and the super
rich 26%. Due to the regressive nature of total payroll taxes the
superrich are paying a total tax rate lower than all those who make
more than $20,000. The superrich pay roughly the same tax rate as
the poor. The rest of us pay more!

Initially, we thought we were asking, "Is it fair for
the poor to pay nothing, while the rich pay 27%?" but now that we account
for all the payroll taxes, the question becomes, "Is it fair to demand
over 25% from the middle class, while the superrich pay less than 25%?"
We also now ask, "How many people are being pushed into poverty by
the high tax rate placed on the lower wage earners?" Our fear of impoverishing
people through taxation has led us to lower taxes on those who are not even
at risk of falling to middle class through taxation, while keeping taxes
on the lower income families high enough to push them towards, even into,
poverty.